United Parcel Service
Headquarters: Atlanta, United States of America
Founded: 1907 as American Messenger Company
What does it take to start and build a hundred-billion logistics behemoth? In the case of United Parcel Service, the answer is simple: two bicycles, a phone, a couple of teenagers – and over a century of hard work. UPS was founded as the American Messenger Company by 19-year-old Jim Caseyand his business partner Claude Ryan in 1907. With just $100 in initial funding (a small bank loan), most of the company’s early deliveries were done on foot, with bicycles used for longer journeys. It took six years before the company took delivery of its first vehicle, a Ford Model T. Initially serving stores in Seattle, the company then branched out to deliver packages in California, where it changed its name to United Parcel Service and invested in its first conveyor belt for sorting parcels.
Despite its modest beginnings, the company now transports around six percent of the United States’ daily GDP, three percent of global GDP, and is one of the hundred largest publicly-listed companies by revenues worldwide. Now operating from 1,800 facilities, UPS utilizes 125,000 delivery vehicles across the world, in addition to hundreds of planes. The parcel delivery market has become infinitely complex as volumes have grown, and the company has just come off a large multi-year capital investment program in new, modern facilities as well as automation technology.
“ the company now transports around six percent of the United States’ daily GDP, three percent of global GDP, and is one of the hundred largest publicly-listed companies by revenues worldwide. ”
About half the company’s revenues come from transporting parcels within the United States, with another third of sales earned internationally. The balance of the company’s business is conducted within the Supply Chain Solutions segment which, amongst other things, operates a forwarding business and a freight business that UPS exited last year.
Delivering over six billion packages from almost 200,000 network entry points, as UPS did in 2022, is certainly a mammoth operation. Such a task also involves enormous complexity, and this is where UPS’ economic moat lies. The setup of warehouses, sorting facilities, and truck depots forms a physical network which, combined with UPS’ massive scale, makes the company an asset that is virtually irreplaceable. Because this is by nature a highly operationally leveraged business, any new entrant would not only have to lay out many billions of dollars in physical capital but would also need to endure years of losses as volumes scale. This makes UPS’ enterprise extremely hard to replicate, and hence very valuable. It’s no surprise, then, that the company consistently produces returns on capital in excess of 20 percent and has grown sales at 6 percent a year over the last two decades.
“The setup of warehouses, sorting facilities, and truck depots forms a physical network which, combined with UPS’ massive scale, makes the company an asset that is virtually irreplaceable.”
Of course, no talk of new entrants would be complete without mentioning Amazon, which has rapidly grown to take 20 percent of the US parcel market at the ‘expense’ both UPS and FedEx. However, it’s worth noting that while Amazon’s share of volumes is one fifth of the market, its share of the value is about half that. This stands to reason – the volumes delivered by Amazon are small packages received by consumers. These are lower-value deliveries and, because they also take longer to deliver than B2B deliveries, have a lower margin. Still, such is Amazon’s reach in e-commerce that even those parcels delivered by UPS; i.e. not by Amazon’s own logistics operation, make up a material proportion of the company’s capacity. This arrangement became topical when, last year, UPS announced the managed wind down of its business with Amazon. The market took this badly, fearing further pricing pressure as UPS would struggle to fill the empty capacity. We however, were; and are; more sanguine: UPS is efficiently scaling back its capacity while it manages the ‘glide path’ away from these low-margin revenues.
In fact, this move exemplifies the express strategy of UPS CEO Carol Tome to move away from low-value, high-volume business and to make UPS “better, not bigger”. This involves manoeuvring from shifting Amazon’s parcels (which represent a mid-teens share of the business) towards higher-margin volumes in B2B, small business, and healthcare verticals. We think this is a sound strategy – after all, value creation comes only when new growth brings returns in excess of the cost of capital on the incremental investment required to achieve it. If management continue to allocate capital rationally, positioning UPS for continued efficient growth in the US and internationally, we will continue to be very happy shareholders indeed.
